Kvaziobligatsii of currency

For example, 9 of long futures pound fully cover the loss on the two short yen for this period of time. If we try to apply the same principle in FOREX, you discover that exchange rate risk on the 100000th contract dollar / yen will be covered by your pound / dollar rate of not less than $ 4 million.

It would seem that this issue was settled: it is enough to calculate correlation, standard deviation, and then figure out hedge ratio. But the correlation behaves quite unstable, constantly fluctuating in a wide range. For example, the 21-day correlation for the period under review ranged from -0.66 to +0.98 with a mean of +0.27.

Increase in the period while smoothing her behavior, but does not improve understanding of: 50-period fluctuations in the correlation between January and June ranged from -0.01 to 0.86. In addition, the task is complicated by the nature of the behavior of the standard deviation, especially strongly varying rates for the pound / dollar.

Actual market behavior indicates: hedge ratio must constantly change, if we pursue the best option risk management. The problem of dynamic hedging and there is very similar to rebalance, applied in strategy volatility. Is it still possible in some way to determine the size of the desired position? To answer this question, it was necessary to investigate the behavior of the hedge, which proved to be quite closely related to the correlation between the exchange rates.

Pay attention to the simple fact that the cross rate trading GBP / JPY, in reality we are dealing with the spread between the dollar value of the position of the yen and the pound. Since the natural end speculator and investor is to maximize the dollar value (at least we assume), then should not we pay attention to this aspect?

The answer is given two graphs showing the dependence of the dollar value of futures positions on the yen and the pound on the coefficient of correlation and the hedge ratio, calculated according to the method traditionally used hedging.

Eloquently presented graphs indicate areas where the dollar value of the position is maximized. Surely, the ideal goal - to reach the "red corner", where there is a maximization of the dollar value of both the pound and the yen. But in the studied period (one year, from June 2001 to May 31, 2002), this point has never been achieved. It appears, the information helps us to more understanding when to exit the market (or cut some positions that make up the strategy), and when - to enter the market. In this guide is probably point to the possibility of increasing the dollar value or decrease it, because it has reached its maximum.

Moving averages also provide us with information, when to enter or exit the market. But they will not say how true the signals given by them. They do not report why the sudden trend turned in the opposite direction (for example, in mid-March 2002 to the pound / yen)? Please note, we are now considering a purely technical analysis, without addressing the fundamental reasons that may have provided the movement. It is also possible that the turn was dictated in March hit the correlation coefficient in the negative region, from which it took him to get up.

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It remains to sum up. As we have seen, if you want a speculative currency transaction can be converted into a synthetic instrument that acts like a bond. Basically, all work done by us - the usual work of financial engineering, the possibility of repackaging risks or create a new financial product. Should be warned about the dangers of hasty conclusion that it is necessary to use only strategies that performed well in our short survey. The reality is not so simple. Before applying any strategy requires a large amount of research and in-depth study of the risk measures. As it turned out, the idea of the correlation coefficients for decision making at FOREX and futures market is quite productive. However, to fully apply this analysis tool can be only after a thorough understanding of how to decipher his performance. It can not be used as the sole alarm, but as an additional tool - a very good, as is the basis of the causes of a fundamental nature.

Finally important detail. Almost all of the studies, only a small part of which is presented here, were carried out using statistical methods and had no relation to the principles of technical analysis. In general, in practice, an examination of the characteristics with sufficient database reveals many hidden patterns, virtually undetectable by traditional means of technical analysis.